The final version of ESMA’s Guidelines on Remuneration for Alternative Investment Fund Managers (“AIFM”s) (the “Guidelines”) are now available.  The Guidelines will apply from 22 July 2013, subject to the transitional provisions in AIFMD.

The rules will apply to managers of Alternative Investment Funds (“AIFs”) including hedge funds, private equity funds and real estate funds.  Non-EU AIFMs who market funds (using passport arrangements) to EU investors will also be subject to the Guidelines.  AIFMs will be asked to introduce sound and prudent remuneration policies and organisation structures which avoid conflicts of interest that may lead to excessive risk taking.

Relevant Staff

The Guidelines will apply to “identified staff” whose professional activities might have a material impact on the AIF’s risk profile.  “Identified staff” includes:

• Senior management, risk management and compliance staff
• Any employee receiving total remuneration that takes them into the same remuneration bracket as the aforementioned categories of staff

Remuneration & Proportionality

Remuneration of identified staff will need to be structured in a way that promotes sound and effective risk management by, amongst other things, deferring between 40% and 60% of variable remuneration for three to five years and allowing for an ex-post risk adjustment of a staff member’s remuneration by means of clawback clauses.  The implementation of the remuneration policy must be reviewed at least annually and in certain cases a remuneration committee will need to be established.

The Guidelines acknowledge that not all AIFMs should have to give substance to the remuneration requirements in the same way and to the same extent.  However, the only requirements which may be dis-applied relate to non-cash variable remuneration, the requirement to retain non-cash instruments for a period following acquisition and the incorporation of ex-post risk adjustments.  The requirement to establish a remuneration committee may be disapplied for an AIFM which manages portfolios of AIFs of less than €1.25 billion and has less than 50 employees.

Delegation

The Guidelines provide that when delegating portfolio management or risk management activities, the AIFM should ensure that:

• The entities to which those activities have been delegated are subject to regulatory requirements on remuneration that are equally as effective as those applicable under the Guidelines; or 
• Appropriate contractual arrangements are put in place with the delegate in order to ensure that there is no circumvention of the remuneration rules.

Next steps

The Guidelines will be translated into the official languages of the EU. Regulatory authorities must notify ESMA whether they comply or intend to comply with the Guidelines within two months of the date of publication of the translations by ESMA.